Bullish outlook for dividends bodes well for high income ETFs

Jan 29th, 2018 | By | Category: Equities

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The findings of a report by investment analytics and index provider IHS Markit could mean high dividend ETFs are in for a strong year.

Bullish outlook for dividends bodes well for high income ETFs

Thomas Matheson, head of dividend research at IHS Markit.

The IHS Markit Dividend Forecasting Report predicts that 2018 will be the third consecutive year of increasing global dividends and will also see the fastest dividend growth since 2014.

Declared dividends are expected to reach $1.65 trillion globally this year, up 10% from last year, the report shows.

Thomas Matheson, head of dividend research at IHS Markit, commented, “Our positive global forecast is based on a bottom-up analysis of more than 7,500 companies, which collectively show an encouraging economic outlook. In 2018, we expect to see stronger performance across sectors, coupled with resurgent growth in Europe and a notable decrease in dividend cuts.”

According to the report, emerging markets are projected to outperform developed markets in dividend growth. Among emerging markets, the Americas is expected to lead (17%), followed by Asia (12%) and EMEA (12%).

Investors seeking an income play within the emerging markets universe have various options open to them. The largest European-domiciled ETF in the space is the iShares EM Dividend UCITS ETF (SEDY LN) with about $375m in assets under management. It is linked to the Dow Jones Emerging Markets Select Dividend Index, which measures the performance of 100 leading dividend-paying emerging market companies selected by dividend yield, subject to screening and buffering criteria. Taiwan contributes the largest country weight with 25.6%, followed by China (14.0%) and Russia (12.2%). Asia makes up well over 50% of the funds. The ETF has a total expense ratio of 0.65% and has a distribution yield of 3.96%.

The next largest EM dividend ETF is the SPDR S&P Emerging Markets Dividend UCITS ETF (EDVD LN) from State Street Global Advisors. This ETF is linked to the S&P Emerging Markets Dividend Opportunities Index and provides exposure to high-yielding stocks from several emerging markets, primarily also in Asia (Taiwan 20.2%, Thailand 15.6% and China 12.4%), with smaller exposures to the Americas (Chile, Mexico and Columbia all under 1%) and Europe (Russia 6.8% and Poland 0.9%). South Africa is, however, the largest country weight with 26.93%. The ETF currently has a distribution yield of 2.56%. The fund has a TER of 0.55%.

The IHS Markit report forecasts the eurozone to lead developed markets in terms of dividend growth in 2018, predicting an increase of 15%, followed by APAC with 10%. The UK is expected to increase dividends by 10%, slightly more than the US at 8%.

With over £1 billion assets under management (AUM) and a TER of 0.30%, the SPDR S&P Euro Dividend Aristocrats UCITS ETF (EUDI LN) is a viable and cost-effective option for investors looking to capitalise on the report’s projected European dividend growth for 2018.

The underlying S&P Euro High Yield Dividend Aristocrats Index tracks 40 of the highest dividend yielding eurozone companies that have maintained or increased their dividend payout every year for at least ten consecutive years. As of 31 December 2017, the index has a dividend yield of 3.6%.

Globally, the dividend forecasting report predicts the banking sector will have the largest increase in gross pay-outs in 2018, up by $26.1bn year on year, followed by industrial goods and services and technology, with $12.6bn yearly increases apiece. Basic resources are expected to lead dividend growth rates by sector with 16%, followed by construction and materials with 14% and technology with 13%. The report also showed that banks are expected to make the largest overall contribution ($258bn) to total global dividends.

Investors looking for a one-ticket globally diversified equity income exposure could opt for the Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL LN). By region, the ETF mainly consists of stocks from developed markets (North America 40.5%, Europe 33% and Pacific 14.3%) but also offers an 11.7% emerging market exposure. As seems to be the current theme with most high dividend ETFs, the Vanguard option has its largest sector weighting in financials, which take up a quarter (25.8%) of the fund as of 31 December 2017. The ETF offers a relatively low TER of 0.29%.

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